On the alert, but no 'ominous signs of recession'

Most of the important U.S. economic data for the month of March will not be available for a few more weeks, but we have enough to know that the pace of growth in the U.S. economy slowed noticeably in the first quarter of this year. In fact, several early analysts' estimates indicate the economy has expanded by less than 1 percent so far in 2019.

The last time real quarterly GDP growth was less than 1 percent was the fourth quarter of 2015. After that quarter, the pace of growth proceeded to accelerate steadily for the next three years. But since this is now the longest period of economic expansion any of us has ever experienced, it is understandable if a quarter of slow economic growth makes people feel anxious that we are close to the next period of recession.

One of the indicators I always use to monitor the health of the U.S. economy is the Fed's industrial production index measuring output of plastics products. If you look closely at the graph, you can see that the slope in the trend for the U.S. output of plastics products was less steep in 2015 than it had been in 2014, but it unquestionably stayed positive. At that time, I was not particularly anxious about the below-average rate of expansion in the overall economy in the fourth quarter of that year. Some volatility in the data is to be expected, and the clear upward momentum in the plastics data was reassuring.

This past year, however, the trend in plastics production was more worrisome. As a result, I am presently paying much closer attention to the trend in the overall economic data. The best way I can describe my current mindset is that I am alert but not yet alarmed.

The graph shows that production of plastics products declined in the first half of 2018 before it started to recover in the second half of last year. The amount of decline in the data was not severe, but it was more than we have seen for a while. I take some comfort in the fact that despite the decline for part of the year, the total annual output of plastics products eked out a 0.2 percent gain in 2018 when compared with the previous year.

Now let me state again that some volatility in the data, even in periods of recovery, is to be expected. The graph clearly shows two other periods during the past 10 years in which the plastics industry data declined for a few months and then jumped back to the upside. The U.S. economy and the market for plastics products are just too big and dynamic to ever become perfectly synchronized.

In hindsight, it is easy to distinguish the start of a major downtrend from a brief period of consolidation. But it is difficult to know exactly what to expect when you are living through a down period in real time. And you don't have to be a statistician to know that when the growth rates of both the overall economy and total plastics production cycle down under 1 percent, the probability of a pending recession increases.

Nevertheless, I believe the monthly plastics data will soon revert to the uptrend that has prevailed since 2009, and the annual growth rate for the total plastics industry this year will be in the range of 2-2.5 percent. And this hiccup in the first quarter notwithstanding, my forecast for real GDP growth this year still calls for a gain of 2 percent in 2019.

The main reason for my continued optimism is that I believe the recent deceleration in the GDP data was primarily due to two or three short-term trends and one-time events that negatively affected U.S. economic activity but are now behind us. The most important of these was a short-term rise in interest rates in 2018. Interest rates rose appreciably in the second half of last year, and they hit a peak in November. This caused a sharp decline in the stock market for most of December.

This decline in the stock market coincided with the shutdown of the federal government and rising trade tensions with most of our major trading partners, most notably China. The combination of these events had a chilling effect on the U.S. economy over the winter months. But except for the ongoing uncertainty about trade with China, the effects of the other events are fading.

The Fed has stopped raising interest rates for the time being and mortgage rates are the lowest they have been in more than a year. The stock market has recovered all of what it lost last December and is now within about 4 percent of its all-time high. And most, importantly for readers of this magazine, the recent trend in plastics output has been higher.

Naturally, I would like to see all these trends continue higher. But even if they go sideways for a few months before turning upward, I do not see any ominous signs of recession for another year or two. There is just too much momentum in the underlying economic fundamentals.

The gains in the labor market decelerated in recent months, but job growth remains positive. Wage growth is accelerating, gasoline prices are low, and the Fed is in no hurry to raise interest rates. In addition to the strong fundamentals, household incomes will get a boost from tax refunds. There was some concern a few weeks ago that tax refunds were well below last year's levels, but after a sluggish start due to the government shutdown, tax refunds are now back to the same level as last year.